Self Employed Tax
The tax regulations for the self-employed are similar to pay as you earn regulations (PAYE) in that you pay income tax and National Insurance on your earnings.
Being self-employed as a sole trader will mean completing a tax return each year and calculating your tax liability and paying it to HMRC the Inland Revenue like millions of others in the UK. The following is advice you can use, but it's best if you see a qualified accountant or speak to your tax office directly.
The Day You Start Self-Employment
If you're thinking about going self-employed, you're going to have to notify a few people other than your friends and family that this is what you intend to do. Unfortunately, the Government always wants it's slice of your income for tax and National Insurance and doesn't want any of that slipping away.
Whether you're doing extra work on the side while you still have a full-time job paying PAYE, or if you're going it completely alone, you need to inform the Inland Revenue of your intentions.
You need to send notification to the Inland Revenue no more than three months after the month you went self-employed. Usually, this communication is the end of the matter at this stage because the IR just want to know what you're doing.
Find the tax office that currently services your PAYE and notify them. Failure to send in the notification will get you a penalty and have you down as not abiding by the laws of the land. It's simple to do and only takes a few minutes so off you go.
What regulations affect you? Starting and running a business means to have to comply with certain government regulations. You'll need to keep individual records and fill in forms as you progress. Here are some of the fundamental requirements your small business needs to know.
It's your responsibility to register your business for VAT.
You must register for VAT if:
- At the end of any month, the total value of the taxable supplies you have made in the past twelve months or less is more than the current threshold - £85,000 and,
- At any time you have reasonable grounds to expect that the value of your taxable supplies will be more than the current registration threshold in the next thirty days alone.
These rules also apply when you take over a business as a going concern (see Notice 700/9 Transfer of a business as a going concern). It doesn't matter whether the last owner was registered:
- If the business is trading at a level above the limit, then you'll need to register and,
- Your date of registration will be the day you take over the business.
To register for VAT, you must complete Form VAT 1, which you must send to Customs and Excise within 30 days of any of the above.
If your business has a turnover below this threshold, you can register voluntarily.
There can be a business advantage in doing this.
If you're considering voluntary registration, you can get further information from the Customs and Excise National Advice Service Enquiry Line on Tel 0300 200 3700, +44 2920 501 261 or online at https://www.gov.uk/government/organisations/hm-revenue-customs.
PAYE Regulations Tax and National Insurance
PAYE (Pay As You Earn) is the Inland Revenue system for collecting income tax from the pay of employees, including directors, as they earn it. As an employer, you'll need to deduct income tax and National Insurance contributions (NICs) from your employees' pay and submit the deductions to the Inland Revenue.
Many employers decide to use an outside supplier - usually an accountant - to run their payroll for them. An experienced accountant can tell you what systems and forms to use, making sure you don't miss out any essential steps.
Get a starter pack by calling the Inland Revenue New Employers Helpline on Tel 0845 60 70 143. The pack contains taxable pay tables and pay calculators, as well as all the essential forms and information.
Tax Payments When Self-Employed
People earning income that's not part of the PAYE scheme make payments based on their annual tax returns. These forms need submitting each year electronically by 31st January. You then pay tax in two instalments.
- 31st January you make the first payment on account for the current year plus any balance required from previous years.
- 31st July you make the second payment.
Tax rates are the same as if you were on PAYE although you may have dividend receipts to account for as well.
Class 2 National Insurance (NI)
You pay Class 2 NI if your profits are over a certain amount per year. The table below shows the profits threshold with the Class 2 NI you pay per week.
|£ n/a (£2.70)||£ n/a (£2.75)||£5,965 (£2.80)||£5,965 (£2.80)||£6,025 (£2.85)||£6,205 (£2.95)|
Class 4 National Insurance (NI)
You pay Class 4 NI if your profits are over a certain amount per year. The table below shows the profits threshold with the Class 4 NI % you pay.
|£7,755 (9%)||£7,956 (9%)||£8,060 (9%)||£8,060 (9%)||£8,164 (9%)||£8,424 (9%)|
The profits paid at the above percentage, cap out at the Upper Profits Limit that the table below sets out. Then you pay a reduced amount based on the profits above the limit.
|£41,450 (2%)||£41,865 (2%)||£42,385 (2%)||£43,000 (2%)||£45,000 (2%)||£46,350 (2%)|
Recommended Self-Employment Tax Websites
Find more information about going self-employed online at https://www.gov.uk/topic/business-tax/self-employed which is the specialist website from the government.